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Lone Star lessons from Detroit

For many of us in Texas, Detroit’s half century long implosion, and subsequent bankruptcy, seems a million miles away. It is hard to fathom how, over the past 60 years, Detroit’s population fell by more than 60% and manufacturing jobs plummeted by 90%. Throughout my entire childhood, Detroit was the king of cars and most believed nothing could dethrone the Motor City.

It is especially hard to comprehend this stark contrast as Texas’ economy is as hot as the blazing summer. When I drive across the state, the progress is overtly apparent. This strength is documented by the annual CNBC survey on the best states for business. In the seven year history of the study, Texas has always been first or second.

However, it was not always this way and our dominance is not guaranteed.

When I first moved to Victoria 20 years ago half of downtown was empty. The hangover from the first oil boom still lingered. Many people were underwater on real estate investments made with the vision that oil, and land prices, would go up forever.

As Texas’ economy attempted to move forward, oil dropped to $10 a barrel in 1998. The financial impact of declining energy production upon the state continued to build. By 2005, Texas was experiencing budget shortfalls and the unthinkable was discussed— a state income tax. In 2006, in an effort to shore up revenues, Texas added a “margin tax” to certain businesses.

Fortunately, as storm clouds loomed, the Eagle Ford shale expansion began. Virtually overnight, the horizon was dotted with drilling rigs and associated services. New life was breathed into towns like Three Rivers, Karnes City and Cuero. Money quickly flowed into other parts of the Lone Star economy.

With this newfound wealth came speculation of how long the shale boom would last. Initially, there were hopeful comments that it would be nice if this lasted a year or two. Then people projected it to last three to five years. However, now I hear people say it is “different this time” and the shale revolution is going to last twenty to thirty years. Many uttered similar words in the 1980’s too.

Projecting a guaranteed level of economic prosperity twenty or thirty years from now is a fool’s game. Many strange and unanticipated things can and will happen over the next couple of decades.

Knowing this, the state of Texas, and its independently minded citizens, need to be thankful and prudent while times are good.

Although the oil field is circulating dollars across our state, remain cognizant of the fact that oil is a depleting resource. It will not be here forever.

While times are good, live below your means. Save for a rainy day as it will surely happen when we least expect it. Saving for a rainy day also allows smart investors to pick up bargains when the economy cycles down.

Don’t cash checks based upon what might happen many years from now. Detroit thought it would always rule the automotive empire. In the process people made unsustainable promises for healthcare and pensions which ultimately contributed heavily towards the city’s demise. Whether municipalities or individuals, we risk significant trouble when we assume things will be great forever and then make long term commitments.

Furthermore, when cash flow is anticipated, it is easy to borrow money to facilitate growth. Do so with tremendous care. The greatest business failures in history have come from too much leverage. Detroit is just the latest example. Even if Detroit could cut its expenditures by 20% overnight, it would take the once great city 68 years to pay off its debts.

For Texans, times are great. Unemployment is low and business is booming. As such, make hay (or oil) while the sun shines—but never forget to sock it away while business is good. Although it is nice if someone promises to deliver in the future, take your future in your own hands and have the financial resources to live life on your terms. If good times do last for decades—you will have that much more in resources to work with. However, if times turn down you will have the necessary capital to carry you through.

Originally published August 20, 2013 at 4:12 p.m Victoria Advocate